IRS watchdog tells of billions of dollars in losses

So said J. Russell George, the Treasury Inspector General for Tax Administration in congressional testimony Wednesday. At issue are several kinds of refundable tax credits, but most of the fraud stems from the Earned Income Tax Credit, or EITC.

Improper EITC payments amounted to $11 billion to $13 billion in fiscal year 2009, George said. The IRS estimates that between 23 percent and 28 percent of payments under EITC are erroneously issued each year, he said.

"Although the IRS has annually reported billions in EITC improper payments since it began reporting estimates to Congress in 2002, little improvement has been made in reducing these payments," he testified.

Compliance reviews, conducted before checks are issued, could allow the IRS to confirm taxpayers' identity, correct errors and audit some returns.

"Based on our review of the various refundable credits, we believe the IRS should require individuals to provide documentation to support eligibility for all refundable tax credits," he told the U.S. House of Representatives' Subcommittee on Oversight, a panel of the Ways and Means Committee. "If such documentation is required, the IRS will also need math error authority to deny refundable credits when supporting documentation is not provided."

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Steve Miller, deputy commissioner for services and enforcement at the IRS, said the agency faces a huge administrative challenge dealing with refundable credits because of tight deadlines combined with the complexity of the tax code.

"The IRS must deliver the promised refunds in the intended time frames while ensuring that appropriate controls are in place," he said, according to Bloomberg.

He also said that new paperwork requirements could results in delays in giving taxpayers their refunds. The maximum EITC is $5,666.

U.S. Rep. Charles Boustany, R-La., said during the hearing that not enough is being done to "stem the tide" of improper payments, according to Bloomberg. "The agency has also failed to implement years of inspector general recommendations that, if accepted, could save taxpayers billions of dollars."

U.S. Rep. John Lewis, D-Ga., noted the EITC "lifts families and their children out of poverty and into the middle class." While the program's administration could be improved, "we should not used flawed estimates based on old data to single out working, middle-class Americans," he said, the Wall Street Journal reported.

Nina Olson, the national taxpayer advocate, told lawmakers that improper EITC payments accounted for 5 percent of the last estimated tax gap, The Hill reported.

"Sounds to me like we need to do a lot more research into the 95 percent of other areas where folks aren't paying their taxes properly or making mistakes before we go after middle-class families and target them," said U.S. Rep. Xavier Becerra, D-Calif.